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Jerome Powell’s Friday Warning Weigh Down On European Stocks

  • Euro Fear Index jumps to a six-week high of 29.4
  • European shares fall to one-month low
  • Britain’s markets spared the holiday
  • Valneva rises on upbeat COVID booster data

On Monday, European shares fell, with technology stocks leading the way lower, while bond yields rose as central bankers’ remarks stoked worries about drastic measures to combat inflation amid rising recessionary risks.

A more than one-month low was reached by the STOXX 600 (.STOXX) index, which also saw a 2.4% decline in interest rate-sensitive tech stocks (.SX8P). The 10-year yield on German debt increased by 10 basis points (bps) to a two-month high.

Isabel Schnabel, an ECB board member, issued a warning over the weekend that central banks must take decisive action to combat inflation, even if doing so sends economies into recession. 

Francois Villeroy, a member of the governing council, and policymaker Martins Kazaks also hinted at another significant rate step in September.

They made their remarks in response to Federal Reserve Chair Jerome Powell’s Friday warning that the bank would raise interest rates as high as necessary to stifle economic growth and would do so “for some time.”

The probability that the ECB will increase rates by 75 basis points in September has increased from 24% last week to 63% in the markets.

According to Edward Moya, senior market analyst at OANDA, “the ECB rate decision will demonstrate that the current inflation narrative will force them to deliver massive rate hikes that will kill growth.”

On Wednesday, the latest consumer price index figures are expected to reveal that inflation in the euro area is still uncomfortably high.

Neither Schnabel nor Villeroy indicated what they will support at the following meeting; they may wait to make a decision until they have seen the ECB’s updated economic forecasts and August inflation data.

The “Europe’s fear index” (.V2TX), a measure of stock market volatility for the eurozone, increased to a six-week high of 29.4.

Stocks are expected to fall by almost 3% in just the last two sessions due to a combination of large rate hikes to curb spiraling inflation, an impending recession, and an energy shortage that is dampening investor confidence.

The STOXX has lost almost 4% so far in August after almost retracing June’s sell-off last month.

As soaring gas and power prices deplete the utility group’s cash reserves, Uniper (UN01.DE) requested additional financial assistance from the German government, bringing the total cost of the bailout to an unbelievable 19 billion euros ($19 billion). The company’s shares increased 3.0%.

The STOXX 600 index experienced a general selloff, but real estate stocks (.SX86P), one of the sectors seen as safer bets during economic uncertainty, suffered the slightest losses.

Markets in Britain took a breather as they were closed on Monday for a holiday.

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Author

  • Phyllis Wangui

    Phyllis Wangui is a Financial Analyst and News Editor with qualifications in accounting and economics. She has over 20 years of banking and accounting experience, during which she has gained extensive knowledge of the forex, stock news, stock market, forex analysis, cryptos and foreign exchange industries. Phyllis is an avid commentator on these topics and loves to share her insights with others through financial publications and social media platforms.